Question

Dexter Industries purchased packaging equipment on January 8 for $72,000. The equipment was expected to have a useful life of three years, or 18,000 operating hours, and a residual value of $4,500. The equipment was used for 7,600 hours during Year 1, 6,000 hours in Year 2, and 4,400 hours in Year 3. Required: 1. Determine the amount of depreciation expense for the three years ending December 31, by (a) the straight-line method, (b) the units-of-activity method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the three years by each method. (Note: For DECLINING BALANCE ONLY, round the multiplier to five decimal places. Then round the answer for each year to the nearest whole dollar.) 2. What method yields the highest depreciation expense for Year 1? 3. What method yields the most depreciation over the three-year life of the equipment?

Answer 1

Answer:

Dexter Industries

1. Depreciation Expense for the three years ending December 31:

i) Straight-line Method:

Depreciation charge = (Cost - Residual Value)/Useful life

= Depreciable amount/useful life

Annual Depreciation = ($72,000 - $4,500)/3 = $22,500

Depreciation Expense:

Year 1      $22,500

Year 2     $22,500

Year 3     $22,500

ii) Units-of-Activity Method

Depreciable amount x (hours used/useful life in hours)

or Depreciable amount per hour x hours used

Depreciable amount = $72,000 - $4,500 = $67,500

Depreciation Expense:

Year 1      $28,500 (7,600/18,000 x $67,500) or 7,600 x $3.75

Year 2     $22,500 (6,000/18,000 x $67,500) or 6,000 x $3.75

Year 3     $16,500 (4,400/18,000 x $67,500) or 4,400 x $3.75

iii) Double-Declining-Balance Method

Steps:

Divide 100/useful life = 33.33333%.  This is the straight-line percentage.

Multiply this by 2, to obtain the percentage for double-declining method.

This gives 66.66666%

Depreciation Expenses:

Year 1 = $48,000 ($72,000 x 66.66666%)

Year 2 = $16,000 (($72,000 - $48,000) x 66.66666%))

Year 3 = $3,500  not $5,000 (($72,000 - $48,000 - $16,000) x 66.66666%))

The last year's depreciation cannot exceed the book value less the residual value.

1B) Total Depreciation Expense for the three years by each method:

i) Straight-line Method

Total Depreciation = $22,500 x 3 = $67,500

ii) Units-of-Activity Method

Total Depreciation = $67,500 ($28,500 + 22,500 + 16,500)

iii) Double-Declining-Balance Method

Total Depreciation = $67,500 ($48,000 + 16,000 + 3,500)

2. The method that yields the highest depreciation expense for Year 1:

The Double-Declining-Balance Method

3. The method that yields the most depreciation over the three-year life of the equipment:

None.  They yield the same total depreciation because of the presence of the residual value.

Explanation:

1) Cost of Equipment = $72,000

Useful Life = 3 years or 18,000 operating hours

Residual Value = $4,500

2) Depreciation is systematic reduction of the recorded cost of a long-term asset until the asset's value becomes zero or negligible.  It is an accounting estimate based on the entity's judgement.  It is a way of spreading the cost of a noncurrent asset in accordance with the accrual concept and matching principle over the periods that benefit from the long-term asset.  There are many methods which can be adopted.